Question

12. In the long run: A. there will be no entry or exit of firms in this industry B. new firms enter the industry and curve A shifts to the right. C. firms exit this industry and curve A shifts to the left. D. new firms enter this industry and curve F shifts to the right. 13. The long-run equilibrium price in this industry will be: A. Pi 14. The industry's leng-run supply curve is curve: A. C and the industry is an increasing-cost industry B. C and the industry is a decreasing-cost industry C. C and the industry is a constant-cost industry D. A and the industry is an increasing-cost industry E. F and the industry is a decreasing-cost industry I5. In the short run, a typical firm in a perfectly competitive industry: A. must carn only an economic profit B. must earn only a normal profit C. must earn only a negative economic profit D. may earn positive, negative or zero economic profits 16. In the long run, a typical firm in a perfectly competitive industry: A. must carm only an economic profit B. must ean only a normal profit. C. must earn only a negative economic profit D. may eam positive, negative or zero economic profits Figure 1 Indairy Questions 17-24 are on the other side

Answer 1

12. The correct option is

• B. new firms enter the industry and curve A shifts to the right.

The current price is P1, and as can be seen in figure below, at P1 price, there is abnormal profit. This would attract entrants in the industry, which would decrease the price and shift the supply curve A to right, increasing quantity and decreasing price.

13. The correct option is

• B. P₂.

The long run equilibrium price would be where the average cost is minimum, which is at the price P2. At this price, there is no abnormal profit, and there is no loss, so no firm would leave the industry, and neither one would enter. It would be the equilibrium price in the long run.

14. The correct option is

• C. C and the industry is a constant-cost industry.

In the long run, the price would be at the minimum of the average cost, irrespective of quantity supplied, as in the long run firms may enter and leave. The cost would not increase or decrease in the long run.

15. The correct option is

• D. may earn positive, negative or zero economic profit.

If the price is above P2, the firm is in positive profit. If price is P2, the firm would have zero profit. If the price is between P2 and P3, the firm will continue to operate in the short run, but not in the long run, making negative profit, but covering the variable costs. If the price is less than P3, the firm would shut down.

16. The correct option is

• B. must earn only a normal profit.

In the long run, if price is above P2, firms would make positive economic profit, which would attract entrants, which would eventually reduce the profit to normal profit. Similarly, if price is below P2, firms would leave the market in the long run, increasing the price to P2. Hence, making normal profit is a must for a firm in the long run.